Minimum Wage Increases: Who Really Benefits?

New York and California are set to raise the minimum wage from $10 to $15 per hour over the next few years, which sounds like good news for people struggling to make ends meet. What’s wrong with artificially raising wages across the board is illustrated by this priceless statement issued by California’s Governor Jerry Brown: “Economically, minimum wages may not make sense. But morally, socially, and politically they make every sense because it binds the community together to make sure parents can take care of their kids.” It was eloquently ridiculed by Dan Henninger in the WSJ but the statement bears deconstruction, if only because it illustrates the shallowness of the American electorate for whose support, if not love, Brown is appealing. Sadly, he probably means well.

Well, why does raising the minimum wage make no sense, economically? One would think that the more money a worker earns, the better for him, his family, and the commercial enterprises in which he will spend his hard-earned money. So why not raise the minimum wage to $20 per hour, or, even better, $100 or $1000 per hour? Why can’t teachers or nurses earn as much as Alex Rodriguez? Certainly many teachers and nurses will have better seasons.

The answer is because wages cannot exceed the productivity of the worker or the business will fail. This is the “no economic sense ” to which Governor Brown is referring. A worker earning $10 an hour must produce at least $10 worth of product or service. If he produces more than $10, he is either underpaid or the employer is profiting. If he is consistently underpaid, then he has the right, in a free society, to take his services elsewhere and be paid what he is worth. Usually, the employer benefits, as he is the one who is risking his capital in the business and his profit comes partly from the wage/productivity differential in his favor.

Conversely, if the worker earns, say, $15 per hour and produces value of only $10 per hour, then the worker is getting a windfall even as the employer is losing money. Since most employers are not in business to lose money, one of three things will happen: a small number of workers will lose their jobs (hence the spike in unemployment most studies show is a consequence of artificially raising the minimum wage); or, as is happening in the entry level jobs where the minimum wage is most common, the jobs are being automated (that’s why most people pump their own gas – outside of New Jersey, the only state that bizarrely prohibits drivers from servicing themselves – and even fast food restaurants are reducing staff and automating), in which case many employees will lose their jobs; or the company goes out of business, in which case everybody loses their jobs.

That is why teachers, nurses and a host of other professions (rabbis, for one) that accomplish more for society in real terms do not produce enough “economic” value to be paid what a mediocre professional athlete earns.

Obviously there is a number whereby the minimum wage can be raised and not trigger those Draconian consequences, but the number is speculative, much debated, and will probably vary from industry to industry. That is why a “one size fits all” increase is more problematic. And, certainly, one can make a cogent argument that some floor for wages is necessary to inhibit abuse but a ceiling is necessary as well. What $15 does that $17 or $13 or $10 wouldn’t is a partial mystery, although it has the advantage of being an easily calculable figure.

Each business will decide to what extent the higher wage will impair their profitability and/or viability. Buy why would ostensibly intelligent politicians impose a wage hike that they know will lead to increased unemployment among the most vulnerable elements in society, especially among the youth

for whom minimum wage jobs are often their portal into the work force?

For politicians, raising the minimum wage sounds caring in the short term but it is a very populist move, not to mention popular. Many people will earn more money in the short term, and not just those who earn the minimum wage (few do). But there are jobs whose earnings are indexed to the minimum wage (2X, 4X, etc.) and so many workers (i.e., voters) will be scheduled to benefit, although they too will be subject to the wage/productivity rule delineated above. Many of them will be casualties of this hike as well. So why would politicians support something that in due course will lead to higher unemployment among their constituents?

One reason might be that they have shielded the unemployed from the consequences of their bad decisions through unemployment insurance. Therefore, politicians have an interest in maintaining, increasing and prolonging unemployment insurance as long as possible. Part of every person’s paycheck goes to defraying this eventuality but of course most of it just comes out of the government budgets and adds to the deficit. The dislocation to the family and the psychological stresses on the unemployed are not really factored in by the political class. So raising the minimum wage sounds kind, as Brown mentioned, and it makes sense “politically” because also for a reason that I never considered until several days ago. Call it the latest government scheme.

Here’s how a letter writer (Henry Schmid of Sonoma, California) to the WSJ put it last week, and the government plan is brilliant: the tax implications of raising the minimum wage are enormous. “For a family of four with both spouses making the minimum wage, their federal tax will increase from $4106 to $7219, payroll tax will increase from zero to $379, and the $2400 food stamp credit will be lost. Of the $20,800 increase in income in going from $10 to $15 an hour, $7778 will be diverted to the government, which doesn’t include loss of other income dependent government welfare programs and added costs due to the resulting inflation. Over one-third of the wage increase will flow to the government in the form of increased taxes and reduced benefits.”

I’m assuming his figures are correct, and if they are, the scheme is ingenious when you think about it. The minimum wage increase is just a means for the government to get more revenue from the people, once again from business. And even if there is an interest in getting people off the dole and into the workforce, do those celebrating the doggedness and sensitivity of the liberal politicians pushing the higher minimum wage realize that many, if not most, of the beneficiaries will lose money, in the form of benefit reductions? And if they lose their jobs altogether, well, now their government benefactors have more money to redistribute in the form of unemployment compensation. Indeed, one of the debilitating peculiarities of the welfare state is that it often disincentivizes employment by denying benefits to people who earn more, I suppose, than they should.

Win, win, win, lose. The politicos look good and get the votes of the beneficiaries who do not realize how they are being harmed. The politicos get more money into the government coffers to redistribute and reward their favorite groups of constituents. The workers think they are earning much more money, and actually are earning more money, but not as much as they think and are oblivious to the real consequences of the increase. Business pays more of its earnings to government, and either lays off the unsuspecting workers or raises prices, which usually depresses consumer spending (depending on what is being sold). Business suffers, the consumer suffers, and the worker suffers. The only entity that benefits is government.

It is ingenious, but not very moral. The letter writer suggests increasing the Earned Income Tax Credit, which would help the needy. There has to be a better way, linking increased wages to increased productivity, and keeping people gainfully employed for their own spiritual well-being as well as securing their path to financial stability and success. But don’t expect the politicians to find, endorse or encourage that way. For them, it is not as lucrative.

11 responses to “Minimum Wage Increases: Who Really Benefits?”

“Rate of rape and sexual assault was 1.2 times higher for nonstudents than students.” – From the Bureau of Justice regarding female ages 18 -24. It sounds like it is still safer for woman to go to college in the US.

I accept that as good news, although the statement is quite vague. Is a college woman who is G-d forbid raped when visiting another college considered a “student”? Probably not. Sometimes the statistics can be parsed in different ways.
-RSP

You are mostly right on the points you mention. I think there are two other important things that should be added..

First, I think all these politicians are pandering for votes, whether or not they understand the economic implications of a minimum wage. Second and more important, free trade with nations who have very depressed wages but who create virtually the same goods as you do has (and always does) depress lower end wages. If you think that having 11,000,000 Mexican immigrants added to your economy has an effect (which it does in those areas of work that the Mexicans will be capable of competing in), imagine all the Mexican labourers working in Mexico (stats say 25% of the 40,000,000 workers work in manufacturing) and all the Chinese workers (stats say 100 million work in manufacturing). Having free trade with these two countries (as opposed to Canada or Europe) effectively adds enormous competition for the combined manufacturing jobs available in both countries.

There are other factors like transportation costs to consider, but for the most part that’s not only where the jobs are going, but also why wages at the bottom are depressed. Here’s a little example from real life. I have a distribution business where I sell souvenir mugs. Twenty years ago, I bought the mugs in the U.S. for $2.50, sold it to the store for $5.00, and the store sold it for $10.00 to the tourists. Today, i still buy mugs for $2.50 — from China! If there were a tariff on the Chinese mugs, I would be able to continue to buy from the U.S., creating jobs with higher minimum wages for American workers. there are many other downsides to free trade but the two biggest ones are either the complete loss of jobs to the other countries, or the depression of wages in our own.

A few points:
The wage itself is meaningless when compared to the buying power of that wage. There are a number of reasons why the dollar does not go as far as it once did, but I think we can all agree that (the Federal government in general, and) the Federal Reserve System in particular has failed in its mandate to stabilize prices and promote maximum employment. If prices remained stable, there is no reason to fear stable wages.

It is the US government that has the most influence in sending jobs overseas. Whether it is the EPA, OSHA, the IRS and high corporate taxes or the minimum wage, it is government regulations and taxes that push American companies to take the necessary steps to have their goods manufactured across the border.

You mention a number of things, all of which are true in a certain context but not in all contexts. As well, you missed the main point I made. Yes, it’s true that tariffs can over-protect cronies of the the government, and it’s also true that free trade can “in the perfect world” be of benefit. For instance, if you are efficient at raising cows and Mexico is efficient at raising horses, why not each of you focus on your specialty and then trade without tariffs. Everyone is better off.

But, if Mexico were “efficient” primarily because they are paying their wage earners $1.00/hour and you are paying $15/hour, then what will happen is American cowmen will move south across the border and raise their cows using cheap wages. Loss of jobs in the U.S.! And that is exactly what is happening with both Mexico and China vi-a-vis the U.S. economy.

This free trade policy could be part of a larger strategy of world peace or something else, but there is no doubt what it does in terms of losing of jobs.

Dear Irving, (Your comment below had no response tab so I responded again to your first comment)

I mostly agree with your first paragraph and regarding your example of cows and horses.

However, you miss why Mexico is able to pay less than America. America’s salaries are higher in part because of the regulations, such as the minimum wage. By raising the minimum wage from the free-market appropriate rate of the basic sweeper, you also raise the wage of the technician who will not simply stand by as the sweeper is paid close to the same. The floor manager will not allow his salary to be the same as the technician, and on and on. That cost ripples through the entire economy, especially the cost of unions.

While we will lose jobs to places that can do the SAME job at lower NET expense, you are missing the unseen jobs that are created by this process in the USA. You are forgetting about the business opportunities that were too expensive to even start in America, now can afford to do so and hire employees here, as well. And, you are missing the lost American jobs due to the tariffs if and when they are put in place. Candy and cookie manufacturers often take their business elsewhere due to the tariffs, like for sugar, that are already in place.

Which goods and services do you think need tariffs?
What are you recommending? Putting an umbrella tariff on entire countries? Or picking and choosing your favorite goods to place tariffs?

In the end, prices of goods go up and jobs are actually lost due to tariffs, only cronyism benefits.

“Business pays more of its earnings to government, and either lays off the unsuspecting workers or raises prices, which usually depresses consumer spending”

Raising prices may reduce consumer spending in the short run, but reduced consumer spending will lower prices in the long run (which will then raise consumer spending right back to where it was originally). A long term rise in prices can only result from increased consumer demand or a reduction of supply, not from increased labor costs. Increasing the minimum wage will result in a long term rise in prices, but only because it actually increases consumer demand.

When my costs go up for any reason, including the costs of an increase in the minimum wage, the price of doing business goes up. When the price of doing business goes up, I can then close part or all of the business. I can fire those employees who are not worth the extra cost. I can take a loss for the product or service which in turn prevents business reinvestment and growth. Or, I can dump some or all of the cost onto my customers.

The unseen costs of businesses that can not get off the ground or go overseas instead is almost incalculable.

Please explain what I am missing as a business owner.

The extra cost of the minimum wage did not “increase consumer demand” for my goods and services.

What you are missing is this: As a business owner, you’re already charging as much as your customers are willing to pay, so you can’t raise prices any higher than they already are if your labor costs go up. Your profitability simply goes down.

When the price of doing business goes up, you make less profit (in the short run). But as long you are still making some profit on each employee, there’s no reason to fire anyone.

Now, if your profit margins are so small that the only way you can make money is by paying your workers less than minimum wage, then you should find a new business.

You wrote: “There has to be a better way, linking increased wages to increased productivity…”

There is a better way, it’s called “the free market.” A man who deserves higher wages can leave his current employment for one that pays better. It also means eliminating taxes and regulations as much as possible. We should try it some time.